In Dubai, a $175 billion SWF Spreads Its Wings

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Until recently, Dubai’s sovereign wealth fund
invested only in domestic businesses. Now it's recasting itself
as an aggressive and high-profile international
investor.

In April 2014, Mohammed al-Shaibani, CEO of Investment Corp. of Dubai (ICD), the
emirate’s sovereign wealth fund, rose to deliver a
speech at Winchester House, Deutsche Bank’s London
headquarters. ICD and Deutsche had invited more than 100
representatives of major global banks to the investor
presentation, Dubai’s first since 2009 —
the year the emirate asked for a debt standstill at Dubai
World, the government’s flagship holding company,
and received bailouts from neighboring Abu Dhabi.

Al-Shaibani used his speech to defend Dubai’s
profligate policies of the mid-2000s and argued that the
emirate’s spree of buyouts, investments and
prestige real estate projects had largely achieved its aim of
boosting gross domestic product (GDP). "If Dubai had to do the
same again, most likely we would follow the same approach,"
said al-Shaibani, who added that Dubai was gearing up for
another round of infrastructure spending ahead of its hosting
of the World Expo in 2020.

Al-Shaibani’s comments reflect
Dubai’s renewed confidence on the international
stage — as well as ICD’s increasingly
influential and outspoken status as the
government’s principal investment arm. The fund
has grown fast since it launched in 2006. Its latest financial
results, published at the end of May, reveal that it oversaw
some AED 643.7 billion ($175.3 billion) as of June 30, 2014
— up from AED 586.7 billion ($159.7 billion) a year
earlier.

Palm Islands

It’s not just the fund’s surge in
assets that has caught the eye of the financial world. Over
the past few years ICD has grown from a development fund
focused on restructuring the emirate’s
state-owned assets to an aggressive international investor,
adopting a similar strategy to that of Abu
Dhabi’s International Petroleum Investment Co.
(IPIC). ICD has ventured into frontier markets, signed
co-investment agreements with peers such as the Korean
Investment Corp. (KIC) and made headline-grabbing bids for
prestige real estate assets such as London’s
Hyde Park Barracks.

All this seems a far cry from the fund’s
modest beginnings as a holding company for the
emirate’s state-owned enterprises. ICD was
launched in 2006 to oversee the government’s
stakes in companies such as Emirates Group, the aviation
conglomerate, Emirates National Oil Co. and Dubai Aluminium
(DUBAL). Part of ICD’s mandate was to foster
governance standards at these firms. In practice, it took a
hands-off approach, looking on as the network of
state-linked entities known collectively as Dubai Inc.
spent big and borrowed bigger.

The mid-2000s were an era of extravagance in Dubai, as the
emirate sought global power and prestige. ICD was involved
in such record-breaking construction projects as Dubai
Mall, the world’s biggest shopping
center, and the Burj Dubai, its tallest building
— both developed by Emaar Properties, one of the
fund’s portfolio companies. Vast artificial
archipelagos, including the famous Palm Islands, rose from
the Arabian Gulf.

Overseas Strategy

Then, in 2008, the global financial hit. International
investors withdrew capital and Dubai’s real
estate cratered. With billions of dollars of debt due to
mature in 2009, the government scrambled to streamline and
restructure Dubai’s state-owned companies as
it sought to limit the damage. ICD played a major role,
buying several assets once controlled by Dubai World, the
heavily leveraged conglomerate that had overseen many of
the emirate’s most ambitious property
developments, including the Palm Islands. ICD was even
reportedly slated to incorporate Dubai World as a
subsidiary, although ultimately the conglomerate remained
independent, and was forced to accept a $10 billion bailout
from the Abu Dhabi government to meet its debt obligations
in December 2009.

ICD, on the other hand, emerged from the crisis in a
powerful position. Although it had its wings clipped in
2011, when Dubai’s Emir Mohammed bin Rashid
al-Maktoum removed Dubai Real Estate Corp., a $44 billion
domestic real estate company, from ICD’s
balance sheet and brought it under his direct control, the
fund began to use the assets it bought during the
restructuring as a foundation upon which to build an
international portfolio.

The sheer range and scale of ICD’s global
holdings has only started to become clear over the past
twelve months or so. The fund has been counted as one of
the more secretive of Middle Eastern government entities,
but it began to disclose more information last year in a
bid to win the confidence of international investors as
part of a $2.5 billion fundraising program. By sifting
through a 400-page bond prospectus issued in June 2014,
along with some bare-bones financial statements it
disclosed last month, the Sovereign Wealth Center has been
able to build a picture of ICD’s portfolio
that reveals an aggressive overseas investment strategy
encompassing a range of assets and sectors.

Potential Risks

Since 2012 ICD has entered sub-Saharan Africa in a big
way, buying an $300 million stake in Lagos-based Dangote
Cement and signing a cooperation agreement with its parent
company, Dangote Group, a conglomerate owned by Nigerian
billionaire tycoon Aliko Dangote. The fund has pushed into
Far Eastern markets, investing in Ssangyong Engineering and
Construction, a Seoul-based real estate developer. The fund
also owns SmartStream Technologies, a British data company
that manages bond and stock transactions.

ICD continues to hold the bulk of its assets in domestic
companies, however, particularly those in the financial
services and tourism, which remain key drivers of the Dubai
economy. The fund owns controlling stakes in Emirates NBD,
the UAE’s largest bank, and Borse Dubai, the
holding company for the Dubai financial exchange. It also
owns a portfolio of hotels across the city, including the
Palm Atlantis, a vast leisure complex situated on the outer
rim of the Palm Jumeirah, which it purchased from Istithmar
World, the private equity arm of Dubai World, for AED 2.7
billion in late 2013.

Real estate is likely to continue to feature heavily in
ICD’s strategy over the next five years.
Al-Shaibani’s forthright comments at the
investor roadshow last year suggest that the fund will be
be at the forefront of the emirate’s drive to
build up its infrastructure ahead of 2020 World Expo. In
2013 ICD started an internal real estate department, which
is already carrying out a AED 3 billion office and
residential development along Dubai Creek, and launched a
joint venture with Toronto-based Brookfield Asset
Management Inc. that will oversee a Dubai-based real estate
fund.

But experts have stressed that Dubai, and ICD, must be wary
of the risks involved in pursuing another debt-driven
growth strategy, given its near-collapse in 2009. After
al-Shaibani delivered his speech last June, Juergen
Fitschen, then co-chief executive of Deutsche Bank, took
the floor to warn of the hazards: "Managing the expansion
the right way and minimizing potential risks will be
crucial for future investments," he said. ICD would be well
advised to heed that message, even as it flexes its muscles
as an increasingly powerful investor both at home and
abroad.

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